Will Google Continue To Grow, or Will It Sink Into Stagnation?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Google (NASDAQ: GOOG) is one of the largest publicly-held companies in the world by market cap. The company not only dominates in search, but also owns other popular products and services such as YouTube, the Android operating system, and Motorola. Digging deeper, let's take a look at the company's current situation and where it is headed going forward.

Strengths

Google is extremely strong financially, carrying relatively little debt and sitting on a significant pile of cash and short term investments ($45.72 billion to be exact). Google also looks relatively fairly valued going forward:

  52wk Range Price P/E Forward P/E Debt to Equity
Google $556.52 - $774.38 $723.84 22.66
15.62
0.0912

 Data from YCharts and Yahoo Finance

The company generates massive amounts of free cash flow and dominates the domestic Internet and mobile search markets. Android is also a leader in the global smartphone market. Google has a strong business model as well, generating most of its revenues from advertising derived from its websites and mobile apps, which allows them to make money on any operating system or device- including those of competitors. YouTube and the Google main search site have wide moats, and customers use these sites no matter what brand PC or mobile device they buy, or operating system they use.

Weaknesses

Lack of presence in China is a huge weakness for Google. Let me rephrase that, since Android is huge in China. Google isn't able to monetize its presence in China. Baidu owns 72.97% of the search market share in China. Besides competing with China's native search engine giant, Google Play doesn't support paid apps in China. This means that developers in the country will have more incentive to develop competitor's apps.

Kevin Chen of The Motley Fool also pointed out another interesting concept- competitors like Microsoft (NASDAQ: MSFT) seem to be immune from many of these problems. Windows still dominates the desktop space in China, and the Microsoft store has access and popularity in China that Google, at least as of now, can only dream of. Google's business model seems to weaken significantly when another competitor such as Baidu dominates their core business of search. Other emerging markets also have their own native search engines, such as Yandex, which has double the market share of Google in Russia. These other dominant search engines eat at Google's potential overseas revenues.

Opportunities

Google has an immense amount of innovative opportunities- especially in the United States. The company recently landed legendary futurist Ray Kurzweil, who is apparently already working on ground-breaking things such as "natural language understanding" in artificial intelligence. Other possible future innovative products are also in the works, such as Google Glass- a project spearheaded by augmented reality glasses, which may be on the market as soon as 2014. Google even wants to eventually provide Internet, with its Google Fiber offering. It seems like Google is everywhere and wants to be everywhere, and soon they may very well be.

Google is starting to stretch its Droid OS beyond just tablets and smartphones, integrating itself into "smart appliances" and other devices- which should eventually allow connectivity between almost any electrical device in your home. IDC predicts that the Internet-connected devices market will grow to $2 trillion by 2015. Android is a free, open OS that seems to be best positioned to capitalize from this market, and where Droid goes, Google's revenues follow- at least in the United States. This market is another huge opportunity for Google.

One of Google's biggest opportunities exists in enterprising software and apps. Cheaper than Microsoft's Office 365, Google Apps provides a wide array of business essentials, such as email, spreadsheet, and word processing tools: all with cloud-connected collaboration and sharing capabilities. Google Apps will still have a hard time dethroning Microsoft Office, but is seeing rapid rates of adoption- with double the amount of government contracts as Office in 2012. As of now, less than 4% of Google's revenues comes from its enterprise products according to Business Insider. If enterprising continues to grab market share, Google will have another diversified way to monetize growth and generate profits. 

Threats

Many of Google's threats exist abroad, where other native search engines dominate and have the ability to push out Google's search share and, thus, advertising and mobile traffic revenues. Domestically, Google faces threats from competitors such as Facebook (NASDAQ: FB) and possibly even Microsoft Bing. Bing is hardly a threat now, but has slowly been gaining market share. Taking a page out of Google's copycat play book (Google+ seems to be more of a Facebook clone than an original concept), Facebook is planning to launch its own search engine. If Facebook's search engine bears fruit, then it could be a huge, huge threat to Google's domestic dominance. Food for thought: Facebook has also apparently blocked Google from cataloging its pages. 

The Bottom Line

Google is a cash-generating behemoth of a company that enjoys a wide moat in search. The company generates most of its revenue (up to 96%) from advertising derived from its sites. This moat and business model may be challenged in the future, but as of now it is not much of a concern. The company also has the potential to diversify away and rely less on advertising revenues if they can manage to wedge their way into the enterprising software market and steal share away from Microsoft. Monetizing Google Apps will provide a new outlet for growth. The company's continued domestic dominance and diversified growth prospects also outweigh its more minimal risks. Google is a solid company that would make a good long-term investment at these levels. 


Jharry1 owns shares of Microsoft. The Motley Fool recommends Baidu, Facebook, Google, and Yandex. The Motley Fool owns shares of Baidu, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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